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Full text of "ANNUAL REPORT - ONTARIO ENERGY BOARD (fiscal year ended March 31, 1980)"

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Government 
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Ontario 



Ontario 
Energy 
Board 



ANNUAL REPORT 



Fiscal Year Ended March 31, 1980 



„ v T ninABt MATERIA!- 
DEPOSITORS UBBAJW 



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5 

'/annual report 

Fiscal Year Ended March 31, 1980 




Ontario 



Ministry Of 416/965-4286 Queens Park 

Energy Telex Toronto Ontario 

Enrgy Tor 
06-217-880 



April 10, 1980 



TO THE HONOURABLE PAULINE M. McGIBBON 
O.C., B.A., LLD., D.U. (OTT) 

Lieutenant-Governor of the Province of Ontario 



MAY IT PLEASE YOUR HONOUR: 

I take pleasure in submitting the Twentieth 
Annual Report for the Ontario Energy Board 
for the fiscal year ended March 31, 1980. 



Respectfully submitted 



Robert Welch 
Minister of Energy 



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lis M- " 




Ontario 

Ontario 416/963-0815 9th Floor 

P 14 Carlton Street 

tnergy Toronto Ontario 

Board msbu2 



March 31, 1980 



Honourable Robert Welch, Q.C. 
Minister of Energy 
Queen's Park 
Toronto, Ontario 
M7A 2B7 



Dear Mr. Welch: 



I have the honour to present herewith the 
Annual Report of the Ontario Energy Board for the 
fiscal year ended March 31, 1980. 



Respectfully submitted, 



0. CU^ 

Robert H. Clendining 
Chairman 



5 



TWENTIETH ANNUAL REPORT 



OF THE 



ONTARIO ENERGY BOARD 



Fiscal Year Ended March 31, 1980 



CONTENTS 



Page 



INTRODUCTION 1 

Role of the Board 1 

Major Activities of the Board 2 

COMPOSITION OF THE BOARD 4 

SUMMARY OF PROCEEDINGS BEFORE THE BOARD 5 

Under The Ontario Energy Board Act 5 

Under The Municipal Franchises Act 6 

NATURAL GAS 6 

Rates 6 

1. The Consumers' Gas Company 7 

2. Union Gas Limited 10 

3. Northern and Central Gas 

Corporation Limited 12 

4. Others 13 

Accounting Orders 14 

Unitization 15 

Gas Storage 16 

Drilling 16 



Page 



Pipelines 17 

Exemptions 17 

Franchises and Certificates 18 

Acquisitions 20 

1. Natural Resource Gas Limited 20 

2. Inter-City Gas Limited 21 

ONTARIO HYDRO 22 

Bulk Power Rates 22 

Costing and Pricing Principles 24 

COST OF ADMINISTRATION 27 



11 



ONTARIO ENERGY BOARD 
ANNUAL REPORT 
Fiscal Year Ended March 31, 1980 



INTRODUCTION 

Role of the Board 

The Ontario Energy Board was established in 1960 as 
the successor to the Ontario Fuel Board. It reports 
annually to the Minister of Energy. Pursuant to the 
Ontario Energy Board Act (the "Act") , The Municipal 
Franchises Act and The Petroleum Resources Act, the Board 
regulates rates and other matters relating to the opera- 
tions of provincial natural gas utilities as well as 
certain aspects of the oil and gas industry. The Board 
bases its regulatory decisions on the evidence presented 
by the parties at a public hearing and on information 
within its specialized knowledge of which it may take 
notice. 

Upon reference being made to it, the Board also has 
an advisory function to the Minister of Energy on Ontario 
Hydro's bulk power rates and rate-related matters, to the 
Lieutenant Governor in Council on any question respecting 
energy, and to the Minister of Natural Resources on 
certain matters relating to oil and gas production. 



- 2 - 



Major Activities of the Board 

The principal matters dealt with during the fiscal 
year ended March 31, 1980 were the rate-related proceed- 
ings of Ontario Hydro, including the conclusion of the 
costing and pricing hearing which commenced in 1977, and 
the rate proceedings of the natural gas distributors: The 
Consumers' Gas Company ("Consumers 1 ")/ Union Gas Limited 
("Union"), Northern and Central Gas Corporation Limited 
("Northern and Central"), Inter-City Gas Limited ("Inter- 
City") and Natural Resource Gas Limited. The Board sat 
for a total of 115 days during the fiscal year on these 
and other matters. 

The major gas rate applications resulted from the 

continued escalation of all costs and in particular the 

cost of gas supply and its distribution in Ontario. The 

Federal Government increased the Toronto city-gate price 

of natural gas (the price at which TransCanada PipeLines 

Limited ("TransCanada") delivers gas to southwestern and 

eastern Ontario) from $2.00 per standard thousand cubic 

feet ("Mcf") to $2.15 per Mcf on August 1, 1979 and to 

$2.30 per Mcf on February 1, 19807~7 

-J 

The Board completed the Phase I (rate base, return 
thereon and reasonable return) portion of Consumers* 
application from the previous year. The phasing of rate 
hearings is described on page 6 of this Annual Report. 
Phase I proceedings for Union and Phase II (rate design) 



- 3 - 



proceedings for Consumers' and Northern and Central were 
pending at the end of the fiscal year. As part of the 
rate proceedings of these utilities, the Board dealt with 
applications for interim relief. In addition, interim 
rate relief was granted to Inter-City Gas Limited. 



( The Ontario Hydro costing and pricing proceeding 
was completed with the Board's report of December 20, 
1979. The Board also reported to the Minister on the 
separate matter of the increased bulk power rates 
proposed by Ontario Hydro for the calendar year 1980. 

The conversion of Union's gas rates into metric 
units ("SI") was completed during the fiscal year. It is 
expected that the conversion process for the other gas 
utilities will be completed during 1980. 

The Board is continuing to examine its pre-hearing 
and hearing process with a view to streamlining it, and 
has already initiated some procedures to this end. 

The Board initiated an interministerial committee to 
review and revise its "Environmental, Agricultural and 
Resource Guidelines for the Construction and Operation of 
Pipelines in the Province of Ontario". The Committee 
also reviews applications to the Board and to the 
National Energy Board in the context of pipeline 
construction and land restoration measures in Ontario. 



- 4 - 



The Municipal Franchises Amendment Act, S.O. 1979, 
c. 83 was enacted during the fiscal year. It clarifies 
that a Board order under s. 10 of that Act renewing or 
extending the term of a municipal gas distribution fran- 
chise is deemed to be a valid by-law of the municipality 
for the purposes of that Act. 



COMPOSITION OF THE BOARD 

At the end of March 1980, the Board consisted of 
eight full-time Members and one part-time Member, namely 



R. H. Clendining, P.Eng. - Chairman 

S. J. Wychowanec, Q.C. - Vice Chairman 

I. C. MacNabb, P.Eng. - Vice Chairman 

H. R. Chatterson, B.Comm. - Member 

J. C. Butler, P.Eng. - Member 

J. R. Dunn, P.Eng. - Member 

D. M. Treadgold, Q.C. - Member 

I. B. MacOdrum, LL.B. - Member 

L. Waverman, Ph.D. - Part-time Member 



Dr. W. W. Stevenson, formerly a Member of the Board 
who was appointed to the Royal Commission on Electric 
Power Planning during the 1977-78 fiscal year, was 
appointed Executive Coordinator of the Strategic Planning 
and Analysis Group at the Ministry of Energy following 
the completion of the Commission proceedings in December 
of 1979. 



- 5 - 



Principal staff of the Board were: 



Director of Operations - D. D. McLean 

Board Secretary - S.A.C. Thomas 
Energy Returns Officer and 

Manager, Financial Analysis - 0. J. Cook 

Board Solicitor - L. Graholm 

Special Projects Officer - D. R. Cochran 

Manager, Engineering - C. J. Mackie 

Board Engineer - H. Strozyk 

Financial Analyst - A. Meddows-Taylor 

Financial Analyst - A. M. Parekh 

Financial Analyst - R. Cappadocia 

Economist - M. F. Rodrigues 



SUMMARY OF PROCEEDINGS BEFORE THE BOARD 

During the fiscal year, 88 proceedings were 
commenced before the Board: 79 by application, 2 by 
ministerial reference, and 7 by letter of request. 

A classification of the proceedings completed is as 
follows: 

Under The Ontario Energy Board Act 

Number 

Rates and other charges for gas .... 21 

Gas storage 5 

Leave to construct pipelines 2 

Acquisitions 1 

References by Ministers 4 

Miscellaneous 9 



- 6 - 



Under The Municipal Franchises Act 

Gas franchises 39 

Certificates 2 



TOTAL 83 



In certain instances hearings were held at locations 
outside Toronto convenient to interested parties: namely, 
Mississauga, Sarnia and Rodney. 



NATURAL GAS 



Rates 



The Board has been dealing with the main rate 
applications of the major gas distributors in two 
phases. In Phase I the Board determines rate base, 
actual return on rate base and reasonable return on rate 
base. Rate base represents the investment which the 
distributor has made in facilities which are used in its 
utility business. In Phase II the Board determines the 
actual rates (or price at which gas is sold to the 
various customer classes) necessary to permit the dis- 
tributor to earn the reasonable return on rate base. 



- 7 



What follows is a brief description of the rate 
cases completed by the Board during the fiscal year. 

1 . The Consumers' Gas Company 

( a) Phase I Proceedings 

/- 

L-In August 1979, the Board rendered its decision 

on the Phase I portion of Consumers' main application 

filed in the previous fiscal year. 7 

The rate base was determined to be $810,678,800 
as at September 30, 1979, Consumers' fiscal year end, and 
the reasonable rate of return 10.34%, calculated as 
follows : 

Capital Component 
Long-term debt 
Preference stock 
Deferred taxes 
Common equity 



Percen- 


Cost 


Return 


tage 


Rate 


Component 


49.5 


9.28% 


4.59% 


12.8 


6.52% 


0.84% 


3.0 


1.83% 


0.05% 


34.7 


14.00% 


4.86% 


100.0% 


10.34% 



The Board determined a revenue deficiency of $15,565,000 
on the basis of Consumers' budgeted figures for the 
fiscal year, as adjusted. ("Revenue deficiency" is the 
amount required to increase the return of the utility to 
that found reasonable by the Board.) j 



- 8 - 



In 



order to monitor Consumers' marketing 
policy, the Board ordered the Company to submit for 
consideration in Phase II a proposal for monitoring the 
return and net present value on new sales resulting from 
system expansion commencing with the Company's fiscal 
1979. 

Among other matters, the Board also ordered 
Consumers' to defer any higher unit gas costs resulting 
from reduced volumes taken from TransCanada in any fiscal 
year and to amortize such costs over the following three 
fiscal years, and to file in Phase II a specific proposal 
as to the mechanics of amortizing such costs. 

At the end of the Phase I hearing a motion by 
Board counsel was heard requesting the Board to order a 
study by an independent expert to develop a capital 
structure for Consumers' Ontario utility operations. The 
Board ruled that a preliminary review of such study be 
filed within three months. The requested review was 
filed and, in October 1979, the Board directed that the 
study be completed as soon as possible. 

(b) Interim Proceedings 

Effective October 1, 1979, Consumers' was 
granted interim rate increases ranging from 1.2$ per Mcf 
to 13.8$ per Mcf to recover the revenue deficiency of 



- 9 - 



$15,565,000 found in Phase I. The Board stated that in 
normal circumstances the levels of over- and under- 
contribution by customer classes should not be in issue 
during an interim proceeding except in the event of a 
considerable time lapse since the previous Phase II or a 
major or unexpected change in circumstances. 
Accordingly, the rate increases to the various customer 
classes were based on the cost allocation study tested in 
the previous Phase II, and on Consumers' sales volumes 
for its fiscal 1980. 

During the fiscal year Consumers' was also 
granted the following interim rate increases to pass on 
the effect of the previously noted gas cost increases 
from TransCanada: 

Amount Effective Date 

13.99<f per Mcf September 1, 1979 

15.224(f per Mcf April 4, 1980 

(c) Phase II Proceedings 

Consumers' Phase II application of November 
1979 was heard in January 1980 and the Board's decision 
was pending at the end of the fiscal year. 



- 10 - 

2 . Un ion Gas Limited 

(a) Phase I Proceedings 

The hearing of Union's Phase I application of 
March 1979, including argument, was completed in December 
and the Board's decision was pending at the end of the 
fiscal year. 

(b) Interim Proceedings 

Effective January 1, 1980, Union was granted 
interim rate increases to recover $14,186,000 of a 
claimed $31,428,000 revenue deficiency due to increases 
in distribution costs. The Board accepted Union's 
proposal as to the method of recovery although it was not 
based on the cost allocation study tested in the previous 
Phase II. The Board stated that it was doing so because 
an extreme imbalance between revenues and allocated costs 
by customer class had occurred. In the result, recovery 
of the interim deficiency was entirely from Union's resi- 
dential, general service and storage customers. This 
decision in effect refined the principle referred to in 
the Consumers' interim deficiency decision reported on 
pages 8-9 of this Annual Report. 

During the fiscal year Union was also granted 
the following interim rate relief to pass on the effect 
of gas cost increases from TransCanada and its other 
suppliers: 



- 11 - 



(i) An increase of 15.17<p per Mcf to residen- 
tial and other fixed rate customers, 
effective November 21, 1979. Other 
customers' rates were increased by similar 
amounts, effective September 1, 1979; and 

(ii) An increase of 15.65$ per Mcf to residen- 
tial and other fixed rate customers, 
effective March 19, 1980. Other 
customers' rates were increased by similar 
amounts, effective March 1, 1980. 

As indicated earlier, the conversion of Union's 
rates into metric units ("SI") was accomplished during 
the year. It did not result in higher bills to Union's 
customers. Commencing September 1, 1979, the Board 
permitted billing in SI. Billing under some of the 
contract rate schedules is to become effective upon 
renewal of the contract, but not later than August 31, 
1981. The rate increases granted to Union referred to in 
this Annual Report have been converted to the former 
Imperial units for ease of comparison as the rate 
schedules of the other gas utilities have not yet been 
converted to SI. 



- 12 - 

3 . Northern and Central Gas Corporation Limited 

(a) Phase I Proceedings 

In the Board's Annual Report for fiscal 1978-79 
it was mentioned that one of the intervenors in Phase I, 
representing 40 municipalities in Northern and Central's 
service area, had petitioned the Lieutenant Governor in 
Council requesting that costs be awarded to it and to the 
Industrial Gas Users Association, another intervenor. By 
Order-in-Council O.C. 1203/79 dated April 25, 1979, the 
Board's decision refusing costs was confirmed. 

(b) Phase II Proceedings 

In a decision dated April 27, 1979, the Board 
refused a motion by Northern and Central for certain 
directions in regard to studies which were to be filed 
for Phase II of its main application. In the special 
circumstances of the case the Board awarded costs of the 
motion to intervenors. 

The hearing of Phase II commenced in March 1980 
and was not completed by the end of the Board's fiscal 
year. 

(c) Interim Proceedings 

During the fiscal year Northern and Central was 
granted the following interim rate relief to pass on the 
effect of gas cost increases from TransCanada: 



- 13 - 

(i) Increases ranging from 11. 178$ per Mcf to 
16.975$ per Mcf, effective August 1, 1979; 
and 

(ii) Increases ranging from 14.284$ per Mcf to 
14.942$ per Mcf, effective February 1, 
1980 for interruptible service and 
February 13, 1980 for firm service. 

4. Others 

(a) Inter-City was granted the following interim 
rate relief to pass on the effect of gas cost increases 
from its supplier, ICG Transmission Limited, which in 
turn receives its gas from TransCanada: 

Amount Effective Date 

14.43$ per Mcf November 1, 1979 

12.69$ per Mcf March 1, 1980 

Inter-City was also granted temporary winter service 
rates for Boise Cascade Canada Limited for the 1978-79 
and 1979-80 winters. 

(b) Four Seventy Dundas Limited (now Natural 
Resource Gas Limited; see Acquisitions section of this 
Annual Report) was granted initial rates and other 
charges effective on bills rendered after September 18, 
1979. The rates and other charges approved were 



- 14 - 

identical to those previously applicable to The Medina 
Natural Gas Company, Limited. 

(c) The Board also extended the existing interim 
rates of Tecumseh Gas Storage Limited and of the joint 
venture of Union and Imperial Oil Limited relating to the 
Bickford and Sombra gas storage pools, for a period of 
not more than one year. 

Accounting Orders 

Early in the fiscal year the Board extended the 
acconting order permitting Union to defer in a special 
inventory account the cost of synthetic natural gas 
("SNG" ) purchased from Petrosar Limited, together with 
carrying charges. The extension was granted to 
November 1, 1979, the expiry date of a new agreement 
whereby Union proposed to sell the SNG to Northern 
Natural Gas Company of Omaha ("Northern"). The agreement 
was subsequently extended on several occasions and the 
Board granted two further extensions of the accounting 
order, most recently to June 30, 1980. 

On January 15, 1980, the Economic Regulatory 
Administration ("ERA") of the United States Department of 
Energy had authorized Northern, subject to condition, to 
import the gas in question at the then prevailing export 
price. However, the transaction failed to receive 
renewed ERA approval when the Canadian Government 



- 15 - 

increased the export price to $4.47 (U.S.) per million 
British Thermal Units on February 17, 1980, and the 
agreement between Union and Northern expired on March 15, 
1980. 

During the fiscal year the Board also granted 
approval to Union, Northern and Central and Consumers' to 
make certain changes to their minimum rule and plant 
units for accounting purposes. 

Unitization 

By order made in December 1979, the Board unitized 
the various interests within the Aldborough Pool consist- 
ing of 900 acres located in the Township of Aldborough, 
County of Elgin, for the purpose of drilling or operating 
gas wells and the apportioning of costs and benefits. 
Clifford B. Coates, the applicant and owner of the 
majority of the working interests, was designated manager 
of the unit operation. The order is not to come into 
effect until a working interest agreement between the 
applicant and Consumers' is filed with the Board. Such 
an agreement had not been filed by the end of the fiscal 
year. 

The Board- ruled that the applicant should pay a 
royalty of 5% of the wellhead value of all gas sold from 
the Pool up to a total of $50,000 in gross revenues in a 
particular calendar year, and 15% on the balance of the 
gross revenues. 



- 16 - 



Gas Storage 

During the fiscal year the Board approved the 
parties, term and storage of a short-term agreement 
whereby Union would store additional gas for Consumers'. 
The agreement is on a best efforts basis and expired on 
March 31, 1980. The Board also permitted variation of 
the term and storage of an existing agreement between 
Union and Gaz Metropolitain, inc. of Montreal. The 
definite term of the agreement was extended to April 1, 
1985, and the maximum storage balance to 170 000 10-* 
cubic meters. 

As well, the Board permitted conversion into metric 
units ("SI") of the gas measurements under storage agree- 
ments between Union on the one hand and Consumers' , 
Northern and Central, the Public Utilities Commission of 
the City of Kingston and Gaz Metropolitain, inc. on the 
other hand. 

Drilling 

The Minister of Natural Resources referred to the 
Board for report applications by Tecumseh Gas Storage 
Limited for permits to drill two wells in the Wilkesport 
Storage Pool and two wells in the Kimball-Colinville 
Storage Pool, located respectively in the Townships of 



- 17 - 



Sombra and Moore, County of Lamb ton. The Board did not 
consider that there were special circumstances associated 
with these matters which would necessitate public hear- 
ings and recommended to the Minister that the applica- 
tions should be granted. 

Pipelines 

In June 1979, the Board granted Consumers* leave to 
construct an 8-inch transmission line extension from the 
City of Pembroke some 13 miles to the Canadian Forces 
Base Petawawa. The construction was completed in 
September 1979 and the pipeline is in operation. 

Exemptions 

Union was granted an exemption under s. 38(3) of the 
Act for the construction of 6.7 miles of 8-inch trans- 
mission line from a proposed Consumers' gas plant near 
the Village of Morpeth to an existing Union line near the 
Town of Ridgetown. The construction was completed in 
October 1979 but the pipeline was not yet in operation at 
the end of the Board's fiscal year. 



- 18 - 

. Franchises and Certificates 

A municipal franchise and the approval of the Board 
in the form of a certificate of public convenience and 
necessity are required in order to construct and operate 
a gas distribution system in a municipality. Prior to a 
franchise by-law being enacted by the municipality, its 
terms and conditions and period must be approved by the 
Board and the by-law must receive either the assent of 
the municipal electors or dispensation of such assent by 
the Board. The Board normally approves a franchise 
period of 20 to 30 years whereas certificates are for an 
indefinite period. 

During the fiscal year the Board approved 
3 7 proposed franchises and extended 1 other, for the 
following distributors and municipalities: 

Consumers' - the Cities of Niagara Falls and 

Peterborough, the Town of Midland, the Village 
of Victoria Harbour, the Townships of Alice and 
Fraser, Bromley, Flos, North Monaghan, 
Otonabee, Smith, Wainfleet and West 
Gwillimbury, the Regional Municipality of 
Niagara. 

Union - the Towns of Oakville and Ridgetown, the 

Township of Brooke (for the Police Village of 
Inwood) . 



- 19 - 

Northern and Central - the Cities of North Bay, 
Sudbury and Timmins, the Towns of Cobalt, 
Cochrane, Espanola, Haileybury, Hearst, 
Iroquois Falls, Kapuskasing, Kirkland Lake, 
Napanee, New Liskeard, Smooth Rock Falls and 
Sturgeon Falls, the Villages of Brighton, 
Burk's Falls, Colborne and Winchester, the 
Townships of Black River-Matheson and Ignace, 
the Regional Municipality of Sudbury. 

In the case of the Town of Espanola the Board also 
granted a certificate to the distributor, Northern and 
Central. In the other cases, except for the Village of 
Burk's Falls where the certificate application was 
pending at the end of the fiscal year, the distributor 
already held a certificate in the municipality. 

In each case except that involving the City of 
Peterborough, upon the request of the municipality and in 
the circumstances of the case, the Board declared and 
directed that the assent of the municipal electors to the 
proposed franchise was not necessary. In the case of the 
City of Peterborough the Board extended the existing 
franchise, under s. 10 of The Municipal Franchises Act, 
and neither assent of the electors nor dispensation 
thereof is therefore necessary. The City of Peterborough 
has appealed the Board's order to the Divisional Court. 



- 20 - 

In four of . the cases, namely those involving the 
Cities of Niagara Falls, Peterborough and Timmins and the 
Town of Midland, the major issue was the indemnity 
clause contained in the proposed franchise agreement. 
The Board confirmed the ruling it had made in the 
Township of Moore case in the previous fiscal year that a 
distributor should not be liable for the negligence of 
any party other than its own officers, servants and 
agents. In the City of Niagara Falls' case the Board 
stated that the ruling followed from its belief that, in 
general, the public interest requires that the costs of 
operation of a gas system should be kept as low as 
possible. In the City of Peterborough case the Board, as 
it had in the Township of Moore case, also rejected the 
proposal that a distributor should pay a franchise fee to 
the municipality. 

Acquisitions 

1. Natural Resource Gas Limited 

The Medina Natural Gas Company, Limited ("Medina") 
experienced financial difficulties and, in August 1979, 
went into receivership. The receiver subsequently 
entered into a provisional agreement to sell Medina's gas 
distribution system to Four Seventy Dundas Limited of 
London, Ontario, and requested the Lieutenant Governor in 
Council to make a regulation exempting the transaction 



- 21 - 



from s. 26 of the Act. At the request of the Minister, 
the Board reviewed the matter and provided a report to 
the Lieutenant Governor in Council. By Ontario 
Regulation 668/79 filed September 18 the requested 
exemption was granted. 

The new gas distributor has changed its name to 
Natural Resource Gas Limited and continues to service the 
area in and around Aylmer formerly serviced by Medina. 

2. Inter-City Gas Limited 

In March 1980, the Board submitted its report and 
opinion to the Lieutenant Governor in Council on the 
application of Inter-City under s. 26 of the Act for 
leave to amalgamate with Canadian Homestead Oils Limited 
and for leave in respect of related matters. 

By Order-in-Council O.C. 833/80 dated March 28, 
1980, the leave requested was granted subject to the 
amalgamation receiving the approval of the shareholders 
of the two companies and being carried out in accordance 
with the amalgamation agreement. Shareholder approval 
was received on the same day. 



- 22 - 

ONTARIO HYDRO 

Bulk Power Rates 

In May 1979, the Minister of Energy referred to the 
Board for investigation and report Ontario Hydro's 
proposed bulk power rates for 1980. Ontario Hydro 
proposed an average increase of 9.9% for the municipal 
utilities and 7.8% for direct industrial customers. 

The Minister requested that the Board report on the 
extent to which Ontario Hydro has kept its proposed 1980 
bulk power cost increase as low as possible consistent 
with the maintenance of its financial soundness. The 
Board was also requested to examine the allocation of 
costs to the municipal utilities, the financial effects 
of Ontario Hydro's surplus generating capacity, future 
export sales strategy and Ontario Hydro's foreign 
exchange management strategy. 

The public hearing concluded on July 27 after 
14 hearing days. There were 17 intervenors whose degree 
of participation in the proceeding varied. 

In its report of August 30, 1979, the Board 
recommended a reduction of over $24 million from Ontario 
Hydro's forecasted total revenue requirement of 
$2,315 million, thereby decreasing the average bulk power 
rate increase of 9.5% proposed by Ontario Hydro to 8.3%. 



- 23 - 



As well, the Board recommended that the differential in 
rate increases to the municipal utilities and direct 
industrial customers be diminished. 

On January 1, 1980, Ontario Hydro increased its bulk 
power rates by an average of 8.3%, which was the figure 
recommended by the Board. 

Among the many other specific recommendations in the 
Board's report, the following were included: 

(a) Ontario Hydro's debt/equity ratio and interest 
coverage should not be permitted to slip, in 
1980, below the levels forecasted for 1979. 

(b) The amount that Ontario Hydro is permitted to 
borrow relative to what it collects from 
customers is a matter on which the Government 
should give policy direction. 

(c) Short-term export sales even at somewhat lower 
prices should be preferred to long-term export 
sales that might lead to insufficient reserve 
capacity for future Ontario requirements. 

(d) Ontario Hydro should examine the economics of 
devoting more resources to its foreign exchange 
management program. 



- 24 - 



Costing and Pricing Principles 

The public hearing on the principles of electricity 
costing and rate making appropriate for Ontario Hydro was 
concluded on June 1, 1979 after 135 sitting days and 
more than 20,000 pages of transcript since its commence- 
ment in March 1977. 

The Board submitted its final report to the Minister 
of Energy in December 1979, concluding that the following 
objectives for the pricing of electricity should be 
adopted : 

(a) Rates should be sufficient to recover Ontario 
Hydro's revenue requirement as currently 
determined in the annual bulk power rate 
hearings. 

(b) Rates should be fair, broadly defined as the 
equal treatment of those causing equal costs. 
The fairness objective requires that costs be 
tracked by rates, undue discrimination avoided, 
and all consumption regarded as new consump- 
tion. 

(c) Efficient allocation and use of resources in 
producing and distributing electricity 
(engineering efficiency) should be encouraged. 



- 25 - 

Economic efficiency, however, is not a measur- 
able, achievable, or valid goal for Ontario 
Hydro. ("Economic efficiency" was defined as 
the allocation of society's scarce resources to 
maximize the satisfaction of consumers.) 

(d) Rate structures should be publicly acceptable 
and comprehensible, should provide rate 
stability, and should be feasible in applica- 
tion. 

The Board also concluded that the concept of time- 
differentiated rates is consistent with the fairness 
objective and recommended that seasonal and daily rating 
periods be established at the bulk power level and, after 
further research, at the end-user level. 

The Board rejected Ontario Hydro's proposal for 
marginal-cost-based pricing because of major problems of 
definition, determination and implementation, and 
recommended the continued use of accounting costs as the 
basis for costing and pricing. 

Lack of comprehensive data on customer response and 
impact in the evidence meant that the significant effects 
of costing and pricing changes could not be identified. 
Consequently, the Board recommended that Ontario Hydro 
improve its data bank and develop adequate demand models, 



- 26 - 

compare the cost effectiveness of time-differentiated 
rates and other load management techniques for smaller 
end-users, begin selective rate experiments for all 
customer groups in the rural retail system and for 
municipal utilities, and prepare and discuss specific 
rate proposals with its bulk power customers. 

The Board recommended the continuation of a single 
customer class at the bulk power level, but one consist- 
ing of the municipal utilities, the present direct indus- 
trial customers, and the rural retail system as a 
notional customer. The Board concluded that the problem 
of allocating diversity benefits would diminish if both 
energy- and demand-related costs were time-differentiated 
and a single customer class adopted. 

The Board made several detailed recommendations on 
such matters as metering, rating periods and the interval 
of time used for determining demand charges. The Board 
cautioned against the introduction of any form of non- 
cost-based rates for purposes of income redistribution. 

However desirable the universal application of new 
rate structures through to the end-user level may be, 
implementation may not yet be cost-effective or appro- 
priate because, the Board observed, an important policy 
decision involving the statutory function of Ontario 
Hydro to regulate rates charged at the end-user level and 



- 27 - 

the need to respect municipal autonomy will be required. 
The Board also indicated the need for an appeal process 
for municipal utilities and end-users who wish to have an 
independent arbiter examine proposed rates, and better 
representation for end-users at public hearings before 
the Ontario Energy Board and during discussions with 
Ontario Hydro. 

Costs were awarded to intervenors seeking them who 
had made a contribution to the proceeding. 



COST OF ADMINISTRATION 

The Board's total expenditures for the fiscal year 
are estimated at $1,296,100 of which $862,119 was 
recovered from applicants by way of fees and costs and 
paid into the Consolidated Revenue Fund. $432,634 of the 
$862,119 recovered resulted from the Ontario Hydro cost- 
ing and pricing hearing and covered a 2-year period. 



AR 

1930 A? 
A?